Victryl Company applies overhead based on direct labor hours. At the beginning of the year, Victryl last year's overhead to be $700,000, machine hours to be 200,000, and direct labor hours to be 35,000. During February, Victryl has 5,000 direct labor hours and 10,000 machine hours. If the actual overhead for February is $98,300, what is the overhead variance?

Overhead variance = $1,700 favorable

Explanation:

Giving the following information:

Estimated overhead = $700,000

Estimated direct labor hours = 35,000.

During February, Victryl has 5,000 direct labor. The actual overhead for February is $98,300.

First, we need to calculate the estimated overhead rate:

To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate = total estimated overhead costs for the period / total amount of allocation base

Estimated manufacturing overhead rate = 700,000/35,000 = $20 per direct labor hour.

Now, we can allocate overhead and then compare it with the actual overhead:

Allocated MOH = Estimated manufacturing overhead rate * Actual amount of allocation base

Allocated MOH = 20*5,000 = 100,000

Overhead variance = real overhead - allocated overhead

Overhead variance = 98,300 - 100,000 = $1,700 favorable